Thursday, April 8, 2010

The VATMan Cometh, pt. 4

"Many people in Congress are interested in it," he said of the VAT, a national sales tax that adds between 10 and 20 percent to purchases in European countries where it's been implemented. "We've had conversations with a number of members and their staffs."

Elmendorf declined to specify which members and said he has yet to field an official request to study a VAT tax. The CBO is in the process of figuring out how best to study a VAT tax's impact, sorting through various structures employed by other countries. Elmendorf also declined to estimate what a VAT tax level would need to be to cover the 2020 debt, which the CBO predicted will be 90 percent of GDP....

Because a VAT is a national sales tax on consumption, he said, it would have less impact on savings and investment than an income tax, but warned that its economic effects should not be underestimated.

"Economists think about people deciding how hard to work or how many hours to work," he said, explaining that the decision to take a higher paying job or work more hours is partly based on being able to buy more stuff with one's money. "Any wedge between value you're producing for your employer and what you can buy is a wedge that can distort. It is still a tax."

He also warned that politicians and economists should not envision an "idealized" VAT tax as a clean, simple system.

"If we were to adopt a VAT tax in this country, it would be subject to many of the same (tax) preferences the income tax is subject to." he said. "The VAT tax itself could become very complicated."

Elmendorf also sounded a grim note on whether the U.S. could potentially grow itself out of the deficit problem.